I cover mobile platforms, digital media and electronic publishing for Enders Analysis. I have worked in strategy and business development for NBC Universal, Channel 4 and Orange, and previously worked as a sell-side equity analyst covering European telecoms. I have an MA in History from Cambridge University. Follow me on twitter at benedictevans

2.5bn Mobile Social Network accounts

There’s nothing terribly new about trying to make ‘over-the-top’ (OTT) voice and messaging services for mobile phones. There was a major flowering of voice-OTT services (mainly based on call-back) half-a-dozen years ago (most of which died off), while Skype has migrated from desktop to mobile as well.

However, the flat route to market offered by apps stores, the immediate scope to save money over SMS and the enhanced social and sharing features that are all possible mean that there has been another explosion in the last couple of years: in effect, these are all now social networks, not just ‘cheap SMS’ tools. Meanwhile, the fact that there are close to a billion users of iOS and Android means the addressable market is huge.

By my count there are:

At least 14 mobile OTT services with over 50m users

At least 20 with over 10m users

Around 2.5bn total user accounts

The chart below shows just the ones I found in an hour’s searching, most of which have given a user number in the last 3 months or so: the major exception is WhatsApp, which I estimated here.

Obviously, there is massive duplication here: lots of people have 3 or 4 different services installed for different groups of friends. One can also quibble about definitions: Opera does not offer messaging but does subvert the operator relationship and the data package (it is not included in the totals above); Facebook is used for more than messaging, and so on.

But the core point is that hundreds of millions of people have installed third party apps to do messaging on their phones that is neither SMS nor email, but within some form of new, closed, proprietary – and much richer – form.

One of these, incidentally, is the mainly Spanish social network Tuenti, recently bought by Telefonica, which with 13m users is by my count only the 19th largest such network. The ‘JOYN’ standard announced by the GSMA at the beginning of the year, which aims to allow MNOs to offer the same rich services using their own networks and integrated into SMS, does not have meaningful number of users yet.

What does this mean for mobile operators themselves? The naive view would be that this is lethal. People will move their messaging from operator bearers to these third-party networks, and then switch to wifi, and the operators will be dead. Or they’ll cancel their voice plan and just use data, or their SMS plan and just use voice or data.

The truth is a bit more nuanced. Consider these chart from Vodafone Group for its European segment.

Vodafone’s view of OTT, pretty bluntly, is that it’s mainly a problem if you don’t do anything about it.

The first piece of revenue that is vulnerable to an OTT service is the ‘out of bundle’ charge: the usage that is charged on a marginal basis, and hence where you have immediate scope to save money by using eg WhatsApp. This is only 11% of Vodafone’s European mobile revenue.

You pay €30 for a combined bundle of 600 minutes, 500 meg of data and 1000 SMS

Operator revenue is the same in both cases, but in the first there is an arbitrage opportunity: if all of your friends are on WhatsApp, you can cancel your SMS plan. In the second, there is no such opportunity to save. The same applies on prepay – different pricing changes the opportunity.

Hence, a key objective for mobile operators is to rebalance their tariffs to remove an arbitrage opportunity: to move to integrated tariffs and cut out this risk. This is not necessarily easy: it is difficult to tell the people happy paying just €20 in the scenario above that they have to start paying €30. Any change in tariff structure creates churn, especially in highly competitive markets, which most mobile markets are. Hence, there is a potentially major transition problem, but this is not necessarily a structural problem.

So, how could such services become a problem for mobile operators? If they were combined with a more fundamental change in the customer relationship. Consider another scenario:

Mainstream smartphones prices move to $100 unsubsidised (the iPhone is currently $650) and hence can be sold unsubsidised without contract (currently, almost all smartphones are notionally available with no contract, but sales are tiny)

Substantial numbers of people move to one-month contracts (currently about 10% of the UK market), buying their own phones

These people move their voice and messaging to OTT players, and hence have no residual stickiness to the phone number (number portability is in place today in most markets but imposes significant friction)

Therefore, such users switch between operators month-by-month chasing the best data plans

This is only one scenario, but all of the moving parts have to happen, and some of them have major barriers. Of course, if we move to a zero subsidy, zero contract market, a lot more would change than just SMS pricing, including Apple‘s margins.

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